Innovation from the Outside In

Stephen DeAngelis

February 17, 2012

“The necessity for big corporations to seek innovative ideas from outside their own organisation is not new,” writes Anthony Goodman. “IBM and Procter & Gamble were early pioneers in the last decade. Apple has made its externally driven App Store a key to its business success this decade.” [“The benefits of giving prizes,” Financial Times, 4 May 2011] Goodman continues:

“A.G. Lafley, the inspirational former CEO of P&G, was a noted advocate for what he called ‘connect and develop’ alongside traditional R&D. In a Harvard Business Review article in March 2006, two P&G executives described how they ‘estimated that for every P&G researcher there were 200 scientists or engineers elsewhere in the world who were just as good – a total of perhaps 1.5m people whose talents we could potentially use.’ Such thinking has influenced product development at pharmaceutical and technology companies and illustrates the benefit of tapping into extended networks beyond the walls of a single company.”

The goal of “outside-in innovation” is to tap into the talents of others at a reasonable cost with good results. As Goodman puts it, “Simply being open to ideas from outside isn’t enough on its own.” The specific strategy on which Goodman focuses is “the use of prizes [to] help lure the best thinking out into the open.” He continues:

“As the Financial Times noted in December [2010]: ‘inducement prizes have the potential to shine. Supplementing direct grants, patents and simple competitive pressures, they can refresh parts of the innovation system that other incentives cannot reach.’ A multimillion dollar industry has grown up around the idea of prize-giving from the non-profit X Prize Foundation to private companies such as InnoCentive in the US and OmniCompete in the UK.”

This is not the first time I’ve discussed the benefits of prizes to achieve specific goals (for example, see my posts entitled A New Approach to Innovation, More Prizes for Innovation, and Contests and Innovation). These posts date back several years. The fact that prizes for innovation continue to make headlines leads me to believe that they may be around for years to come. Vineet Nayar, CEO of HCL Technologies, which has revenues of $3.3bn, and author of Employees First, Customers Second, told Goodman: “Small experiments with ideas could give us rich returns. Crowd-sourcing ideas from the best young brains in the world who have not been ‘brainwashed’ with our current ways is one such experiment.” David Roth, a former Bain consultant, told Goodman that there were two primary benefits to contests:

“First, they promote the development of new ideas and suggestions. Second, they build communities of innovators and signal the broader importance of innovation in general – both in society and within the sponsoring organization. That’s really cool.”

Peter Diamandis, the head of the X Prize Foundation, is convinced that “focused and talented teams in pursuit of a prize and acclaim can change the world.” [“And the winner is…The Economist, 5 August 2010] The article notes that prizes can be traced back to “the Longitude Prize [which] was set up by the British government in 1714 as a reward for reliable ways for mariners to determine longitude.” The article continues:

“Incentive prizes do spur innovation. A study led by Liam Brunt of the Norwegian School of Economics scrutinised agricultural inventions in 19th-century Britain and found a link between prizes and subsequent patents. The Royal Agricultural Society awarded nearly 2,000 prizes from 1839 to 1939, some worth £1m ($1.6m) in today’s money. The study found that not only were prize-winners more likely to receive and renew patents, but that even losing contestants sought patents for more than 13,000 inventions.”

In addition to the organizations named above, Kaggle, a firm started by Australian economist Anthony Goldbloom, was established in 2010 to run competition for companies. “The customer supplies a data set, tells Kaggle the question it wants answered, and decides how much prize money it’s willing to put up. Kaggle shapes these inputs into a contest for the data-crunching hordes. To date, about 25,000 people—including thousands of PhDs—have flocked to Kaggle to compete in dozens of contests backed by Ford, Deloitte, Microsoft, and other companies.” [“Kaggle’s Contests: Crunching Numbers for Fame and Glory,” by Ashlee Vance, Bloomberg BusinessWeek, 4 January 2012]. Vance reports:

“By far the most lucrative prize on Kaggle is a $3 million reward offered by Heritage Provider Network to the person who can most accurately forecast which patients will be admitted to a hospital within the next year by looking at their past insurance claims data. More than 1,000 people have downloaded the anonymized data that covers four years of hospital visits, and they have until April 2013 to post answers.”

The dream of Jeremy Howard, Kaggle’s chief scientist, is to make its best participants wealthy if not famous. “These guys should be earning as much as hedge fund managers and golfers,” he says. Another outside-in strategy used by companies that HCL Technologies’ Nayar discussed with Goodman is called crowdsourcing.

“Small experiments with ideas could give us rich returns. Crowd-sourcing ideas from the best young brains in the world who have not been ‘brainwashed’ with our current ways is one such experiment.”

Rachel Emma Silverman explains, “Crowdsourced labor usually involves breaking a project into tiny component tasks and farming those tasks out to the general public by posting the requests on a website. Many firms that use crowdsourcing pay pennies per microtask to complete projects such as tagging or verifying data, digitizing handwritten forms and database entry.” [“Big Firms Try Crowdsourcing,” Wall Street Journal, 17 January 2012] Silverman continues:

“Companies that have assigned work to the crowd say it is generally cheaper and faster than hiring temps or traditional outsourcing firms. Crowdsourced labor can cost companies less than half as much as typical outsourcing, says Panagiotis G. Ipeirotis, an associate professor at New York University’s Stern School of Business, who studies crowdsourcing. Some individual microtasks can take just a few seconds and pay a few cents per task. More complex writing or transcription tasks might pay $10 or $20 per job, while some highly skilled work, such as writing programming code, commands higher rates.”

Silverman points out that crowdsourcing has caused some concerns. She notes that “workers may sign up for tasks unaware of what their labor may be used for.” Research has revealed that some crowdsource laborers have actually been used to help create spam. Silverman continues:

“Another concern is that crowdsourced labor risks creating what Harvard Law School professor Jonathan Zittrain calls “digital sweatshops,” where workers who may be underage work long hours on mind-numbing tasks for very little money—or, if the work is structured as a game, for no money at all. Crowdsourcing sites often pitch their work to stay-at-home moms or students who can pick up a few tasks to do during short breaks.”

Regardless of the strategy companies use, John Yuva, editor of Inside Supply Management, insists, “In today’s marketplace, innovation is the cornerstone of competitive survival. Few companies can go it alone and remain viable.” [“Share and Share Alike,” Inside Supply Management, Vol. 22, No. 7, September 2011] Yuva obviously believes this is as true for the supply chain sector as it is for other business sectors. He continues:

“Fostering innovation with suppliers through collaborative support and trusted relationships is no easy task. Innovation for any company represents potential revenue and leverage over competitors. It’s time to dismantle the barriers to collaborative innovation and consider the value proposition and return on investment that is attainable. It’s going to require giving and taking from both sides. However, the results may transform how the supply chain collaborates, and bring solutions to the marketplace.”

Yuva makes a number of interesting points which I will discuss in a future post. Even if a company isn’t a good fit for contests or crowdsourcing, it still needs outside-in help. Often that help comes from customers. Ravi Mattu asserts, “Being innovative today means finding how to engage with your customers as early in the process and as deeply as possible.” [“Innovation is all about the customer,” Financial Times, 14 November 2011] Mattu continues:

“Context matters. … The smartest businesses, from retailers to fashion brands to credit card businesses and manufacturers, are trying to engage their customers to drive innovation in their offerings. … B.J. Emerson, head of technology [Tasti D-Lite, a US low-calorie frozen dessert chain], says a failure to engage with customers who are already using [social media] technologies is a form of ‘social negligence’. … Using customers to inform your decisions directly is not just about the clever use of technology. Good designers such as Michael Bierut, a partner at Pentagram and co-founder of the Design Observer weblog, understand this better than most. One of his rules for being innovative … is to ‘shut up and listen’. … For big organisations, the big challenge is how to create a culture that encourages customer-led innovation. The best answer I have heard was from R. Gopalakrishnan, a senior executive at Tata. He said that companies need to be willing to look beyond market research and focus groups to understand the context of what their customers’ needs are.”

Gopalakrishnan’s advice sounds very much like advice you might hear from designers at IDEO or from Harvard Professor Clayton Christensen. Designers at IDEO like to take a “Deep Dive” so that they can understand the context in which consumers will be using the products they are designing. Christensen advises companies to look beyond what customers are saying to discover what they actually need. Henry Ford has been attributed (some claim incorrectly) with saying, “If I’d asked my customers what they wanted, they’d have said a faster horse.” To paraphrase an old adage: a company wrapped up in itself makes a very small package. Outside-in strategies offer companies lots of advantages; but the greatest advantage is a fresh perspective.